From the Roman Empire to China. A Brief History of Domain Names.

THE ROMAN EMPIRE

Imagine you are a citizen of the ancient Roman Empire. You live in a small farm outside of Rome. Animals and vegetables in your farm provide for food and you store the surplus. Occasionally, you need to buy clothes or utensils, so you go to the local market. Despite the fact that, according to Roman law, you could pay fines in oxen and sheep, many vendors do not accept your livestock or food supplies as payment. Animals and food are perishable, and they are not a very practical storage of value. This is why coins gradually replaced the barter system. Back in those days, coins were mostly made of gold and silver. Only Sparta (remember the movie 300?) minted coins made of iron, which were heavy to carry to discourage its citizens from trade, so they could focus on the main business of war. Now imagine someone tells you that, in 2,000 years, you will not need to carry any coins. Wealth will actually be invisible.

Coins of the Roman Empire, gold and silver.

For example, in exchange of the ownership of a random string of 4 letters followed by a “.com” suffix, in an invisible network called “Internet”, you could get at least the equivalent of $200. In exchange of a random 3 letter .com combination instead, you could get a nice $15,000 check.

As you suspect, reality surpasses fantasy. In 2015 the Chinese company QuNar bought QUA.com,an invisible internet string, for $459,000. In 2014 BTC.com (short for “bitcoins”) was bought for $1M. And this is just the tip of the iceberg. According to EstiBot, the leading domain appraisal software, if you combine all the permutations of 2, 3, 4 and 5 number .com domains, and 2, 3 and 4 letter .com domains, you get a market worth over $8 billions. With the current bitcoin market capitalization at $20 billions, this is equal to 40% of all the bitcoins ever mined. Besides these short domains permutations, there are over 300 millions domains registered. The majority of them are not worth much, but many, like house.com, are worth at least 7 digits.

But how did these invisible strings became so valuable? And, if some of them can be exchanged for exact amounts of money, why no one ever compared domain names to a currency? If you talk to Ivan Rasskazov at Intelium, the CFO of the company who created EstiBot, he will tell you that if we look at some of the world’s most traded commodity markets such oil, these markets have taken some time to evolve to where they are today.

Domain names though are not a commodity (they are not fungible – each one is different), but fulfill three out of the five attributes of currency: (1) scarcity, (2) transferability and (3) durability. They only lack (4) fungibility and (5) divisibility. Yet, in the past two years, with the advent of China, it seems like a small group of domain names have also become, in some ways, fungible and divisible, becoming effectively what someone could argue is an alternative to store liquidity. Let’s keep in mind that Gold, a commodity often used as currency, is also not easily divisible and transferable and the US Dollar, the world standard of currency, is also technically not scarce. In fact, the Federal reserve can decide at any time to print more. In 1963 the words “payable to the bearer on demand” were removed from all newly issued dollar bills. Shortly after, in 1971, Nixon officially ended the redemption of dollars for gold and silver.

So let’s assume for a second that domain names are a valid storage of value. How do we go about understanding how much each of them is worth? Let’s analyze supply and demand.

SHORT HISTORY OF SUPPLY AND DEMAND

Back in the mid 90s, there was no Google (incorporated in 1998), no social media and no browser suggestions. People found services online by typing keywords and then adding .com at the end. For example, if you were looking to buy shoes, you would simply type “shoes” on your browser and then add .com. In the book, “The Monk and The Riddle”, venture capitalist Randy Komisar tells the journey of two entrepreneurs looking to get funding for a project called funerals.com. There was no discussion about going for anything other than the exact .com domain. During the .com boom, adding “.com” to your company, raised exponentially your chances of getting venture capital and justified a higher valuation. An exact match .com domain also helped you rank higher in the search engines. In an interview on the DnJournal, Alan Dunn tells the story how he managed to create a network of mortgage sites with over $13 billions in loan requests by leveraging domains like InterestOnlyLoans.com. John Ferber, after buying the domain Advertising.com, managed to sell his company to AOL for almost $500M. He became so fascinated by domain names that he cofounded the brokerage Domain Holdings.

Besides a ramping demand from businesses going online, supply was limited. Until 2001, the only top level extensions available were .com, .net and .org. The biggest recorded sales of those years include Business.com ($7.5M), Loans.com ($3M) and Hotels.com ($11M).

There was indeed value in some of those domain names, but it was not quite clear how much. Domain names were far from being remotely compared to a currency. They were not liquid and it was difficult to establish their fair value. Softwares like EstiBot and people like Andrew Rosener attempted to crack the code (Rosener equation), but overall there was not a straightforward way to appraise their worth. It was like the poker scene in Ocean’s Eleven:

Poker player: Why were you in prison?

George Clooney: I stoIe things.

Poker player: You stole things? Like jeweIs?

Brad Pitt: Incan matrimonial head masks.

Poker player: Any money in Incan matrimonial…?

George Clooney: Head masks. There’s some.

Brad Pitt: Don’t Iet him fooI you. There’s boat Ioads. If you can move them. But you can’t.

There were boatloads of money in domain names. But only if you could actually move them.

CHINA

Then the Internet slowly changed. Browsers started to automatically provide suggestions. People started to rely on search engines which became increasingly more sophisticated and accurate. The direct type-in traffic decreased but the brand value of domains remained. Google’s algorithm still ranked better .com domains. Exact match .com domains were valuable, but not quite as much as before. Many large portfolio owners started to drop their domains. Supply also increased. New extensions became available. In face of a declining demand and increasing supply (the new GTLDs program was about to roll out, making available for the first time over a thousand new extensions like .web, .blog, etc,) something unexpected happened.

Enter China. In 2014 and 2015, a few unrelated events aligned, resulting in one of the largest transfer of wealth ever witnessed. As Alan Dunn described it, China started buying the internet.

E-commerce in China was booming. In 2014, Alibaba became the largest IPO in the world, raising over $25B. A rising class of wealthy Chinese was looking for alternatives where to put their excess liquidity. Real estate in China went through a bubble and the Chinese Stock Market crashed dramatically in the summer of 2015. Add to that the capital restrictions to prevent the outflow of capital, and you get a group of wealthy Chinese that now looks at domain names as a legitimate investment vehicle. The trigger came from a few high profile domain acquisitions by Chinese companies. In 2014, phone maker XiaoMi purchased MI.com for $3.6M. QiHoo, a major Chinese security software company, bought the domain 360.com for a reported $17M.

Chinese demand focused on a specific segment of short and numeric .com domains. The domains sought after by Chinese buyers were appraised using a set of arbitrary rules based on a combination of mathematical conventions and meaning of the letter/numbers:

A NN (2 number domain) is worth approximately 10x of a NNN, and 100x of a NNNN.

A numeric domain without 4, is worth approximately 2x of a domain containing 4.

A LL (2 letter domain) is worth approximately 26x of a LLL and 676x of a LLLL.

A letter domain without a,e,i,o,u,v, is worth 2x of a domain with a,e,i,o,u,v.

2 repeated letters or numbers, are worth approximately 2x of a random combination.

Other rules (8s and patterns increase value, 0s decrease value, etc)

According to ShortNames.com, in 2015, the floor price (10th percentile) of 3 letter .com combinations rose from $8,679 to $23,500, a +171%increase. Most interestingly, the 160,000 four letter .com domains with Chinese Premium combos (also called “chips – that is, domains that do not contain a,e,i,o,u,v) rose from $80 to $2,035, a staggering +2444%increase.

Thousands of domain investors started to ride the Chinese wave of domains as appreciating commodity. People who accumulated over the years a small portfolio of a few hundreds four letter domains, were able to convert their portfolios in millions of dollars. Some domain owners did even better: WE.com sold for $8M and LE.com rumored to have been bought for $10M.

TODAY

Today the supply of domain names is practically infinite. Demand has weakened from the peak year of 2015. But there are still millions of dollars in disclosed transactions every quarter.

Chaomi.cc, one of the numerous Chinese websites that appeared to monitor this market, reports almost $1M in transactions every single day. The majority of these transactions occurs in the 586,848 strong domain niche we define as “liquid domains”. This is a combination of all:

LL .com (2 letter .com, a total of 676 domains).

LLL (3 letter .com, a total of 17,576 domains)

LLLL (4 letter .com, a total of 456,976 domains)

NN (2 number .com, a total of 100 domains)

NNN (3 number .com, a total of 1,000 domains)

NNNN (4 number .com, a total of 10,000 domains)

NNNNN (5 number .com, a total of 100,000 domains)

LN & NL (letter/number, number/letter .com, a total of 520 domains)

In the eyes of investors, these liquid domains are also fungible. Some are better than others, but each one of them is worth at least a specific floor price based on the category they belong. The resale values of liquid domains range for a minimum of $1M for any 2 numbers .com (e.g. 32.com), to a more modest $400 for any five number .com combinations (e.g. 48209.com). We could argue also that few of them, like four letters .com and five numbers .com are also divisible. For example, if you own a portfolio of four letter domains worth $1 million, you can easily sell one unit or more at least for floor value and receive $200 in your bank or PayPal account. Unlike fine art or gold, domain names are also easy to protect. Their renewal fee costs around $10 per year and you could purchase a privacy service for as little as $2. Transferring is also quite easy. You just need to log in your registrar and push the domain to the new owner.

THE FUTURE

For people who invest in liquid domain names, there are 2 major questions:

Will short .com domain names hold their value?

You could argue that with the release of the new domain extensions, .com might lose its appeal. That is certainly possible. At the moment though, the largest companies and brands still prefer .com. Noah Kagan, founder of SumoMe, recently bought sumo.com for $1.5M. In his interview on DomainSherpa, the leading educational website about domain name investing, he reported that he spent this amount on Sumo.com for several reasons that come from his experience.

After all Noah Kagan was an ex employee of Facebook and Mint. He learned the lesson by watching both companies “upgrade” their domain from “TheFacebook.com” to Facebook.com, and from “MyMint.com” to Mint.com, and becoming spectacularly successful as a result. In 2010 Facebook actually went as far as buying FB.com, a liquid domain, for $8.5M. Companies are still spending top dollars to be on a .com because that’s where everyone expects them to be. Even if Facebook would launch today with “face.book”, it will be smart for them to buy Facebook.com because that is the domain that people would type in. As Andrew Allemann reported, also Tesla, after years of using teslamotors.com, finally purchased tesla.com.

Will domain names still be valuable in the future?

If domain names stay a central part of how we access the internet, most likely liquid domains will maintain their value or even appreciate. You could argue that, in a few years, most of our shopping, dating and banking will be online. As Bloomberg reports, as more businesses prefer to sell their products online, we see major brands fleeing prime commercial real estate in New York to refocus online. But, domain names might also become obsolete. The way we access internet might become so different that domains will not be necessary anymore. The short movie “Sight” shows a world in which the way we access internet is completely revolutionized by augmented reality and voice commands. Will this be our reality? We shall wait and see.

For now, liquid domain names can store liquidity because there is an established aftermarket. And, unlike the Incas Matrimonial Head Masks of Ocean’s Eleven, you can actually move them.

Did you enjoy reading this article? If yes, click to get our FREE 12 pages report to learn what drives supply and demand of liquid domain names (+ volumes of transactions).

IMPORTANT NOTICE: This article is for information and illustrative purposes only. The “floor prices” and evaluations provided are subject to change without notice and should not be regarded as investment advice or as a recommendation regarding any particular course of action. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. The author and LXME – Lisbon Media Lda. shall not have any liability for any damages of any kind whatsoever relating to the content of this article.

Giuseppe Graziano

Giuseppe is the CEO and founder of GGRG.com, a domain brokerage and consulting firm based in Lisbon, Portugal. With a focus on the 586,848 short .com domain names defined as “liquid”, Giuseppe has helped his clients sell over 10 million dollars in domain names, receiving award nominations for „Blogger of the Year“ and „Industry Goodwill Ambassador“ in 2015 and „Broker of the Year“ in 2016. Escrow.com awarded Giuseppe “Master of Domains”, as one of the top 3 highest grossing domain brokers in the world in 2016. Giuseppe has lived in 5 countries across 3 continents, speaks 5 languages and holds a Master Degree in International Management from the Fudan University in Shanghai, China.

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